UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the quarterly period ended ~~March 31,~~June 30, 2004


o		Transition Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the transition period from ~~________________~~ to ~~________________~~

Commission file number0-30533

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		75-2679109
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2100 McKinney Avenue, Suite 900, Dallas, Texas, U.S.A.		75201
(Address of principal executive officers)		(Zip Code)

214/932-6600
(Registrant’s telephone number,
including area code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)

Indicate by checkmark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo

APPLICABLE ONLY TO CORPORATE ISSUERS:

On ~~April 30,~~July 31, 2004, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:


Common Stock	~~24,906,908~~	24,978,618
Series A-1 Non-voting Common Stock	~~286,934~~	281,056

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS -— UNAUDITED
(~~Dollars in~~In thousands except ~~per~~ share data)


	Three months ended March 31					Three Months Ended June 30					Six Months Ended June 30
	2004		2003			2004		2003			2004		2003
Interest income
Interest and fees on loans	$	16,706	$	14,696		$	17,498	$	15,981		$	34,204	$	30,677
Securities		7,551		5,360			7,536		5,335			15,087		10,695
Federal funds sold		15		87			18		43			33		130
Deposits in other banks		2		3			4		4			6		7

Total interest income		24,274		20,146			25,056		21,363			49,330		41,509
Interest expense
Deposits		4,743		5,382			4,948		5,597			9,691		10,979
Federal funds purchased		320		440			294		469			614		909
Repurchase agreements		2,085		2,359			2,250		2,320			4,335		4,679
Other borrowings		226		86			56		60			282		146
Long-term debt		256		137			256		253			512		390

Total interest expense		7,630		8,404			7,804		8,699			15,434		17,103

Net interest income		16,644		11,742			17,252		12,664			33,896		24,406
Provision for loan losses		750		1,250			363		1,600			1,113		2,850

Net interest income after provision for loan losses		15,894		10,492			16,889		11,064			32,783		21,556
Non-interest income
Service charges on deposit accounts		857		843			891		897			1,748		1,740
Trust fee income		437		281			454		306			891		587
Gain on sale of securities		—		341			–		345			–		686
Cash processing fees		587		900			–		73			587		973
Bank owned life insurance (BOLI) income		321		414			329		428			650		842
Mortgage warehouse fees		238		279			274		424			512		703
Gain on sale of mortgage loans		463		—			729		–			1,192		–
Other		409		269			439		345			851		614

Total non-interest income		3,312		3,327			3,116		2,818			6,431		6,145
Non-interest expense
Salaries and employee benefits		8,123		5,379			7,964		5,857			16,094		11,236
Net occupancy expense		1,332		1,187			1,341		1,199			2,675		2,386
Advertising and affinity payments		285		193			296		199			581		392
Legal and professional		789		579			779		930			1,572		1,509
Communications and data processing		859		720			995		736			1,854		1,456
Franchise taxes		97		37			56		37			153		74
Repurchase agreement penalties							–		6,262			–		6,262
Other		1,844		1,283			2,065		1,681			3,899		2,964

Total non-interest expense		13,329		9,378			13,496		16,901			26,828		26,279

Income before income taxes		5,877		4,441
Income tax expense		1,940		1,410
Income (loss) before income taxes							6,509		(3,019	)		12,386		1,422
Income tax expense (benefit)							2,149		(6,876	)		4,089		(5,466	)

Net income		3,937		3,031			4,360		3,857			8,297		6,888
Preferred stock dividends		—		(274	)		–		(276	)		–		(550	)

Income available to common stockholders	$	3,937	$	2,757		$	4,360	$	3,581		$	8,297	$	6,338

Earnings per share:
Basic	$	.16	$	.14		$	.17	$	.19		$	.33	$	.33
Diluted	$	.15	$	.14		$	.17	$	.18		$	.32	$	.32

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(~~Dollars in~~In thousands except ~~per~~ share data)


	March 31,			December 31,			June 30,			December 31,
	2004			2003			2004			2003
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	55,203		$	69,551		$	90,754		$	69,551
Federal funds sold		4,620			–			59,970			–
Securities, available-for-sale		752,861			775,338			783,234			775,338
Loans, net		1,293,500			1,212,046
Loans held for sale		72,789			80,780			58,058			80,780
Loans held for investment (net of unearned income)								1,364,106			1,229,773
Less: Allowance for loan losses								(18,278	)		(17,727	)

Loans held for investment, net								1,345,828			1,212,046
Premises and equipment, net		4,635			4,672			4,719			4,672
Accrued interest receivable and other assets		48,031			48,992			55,544			48,992
Goodwill, net		1,496			1,496			1,496			1,496

Total assets	$	2,233,135		$	2,192,875		$	2,399,603		$	2,192,875

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	309,927		$	301,886		$	359,628		$	301,886
Interest bearing		1,131,598			1,094,534			1,174,284			1,094,534
Interest bearing in foreign branches		54,366			48,610			94,485			48,610

Total deposits		1,495,891			1,445,030			1,628,397			1,445,030
Accrued interest payable		2,226			3,468			2,832			3,468
Other liabilities		7,309			6,247			4,023			6,247
Federal funds purchased		90,203			78,961			97,972			78,961
Repurchase agreements		432,291			432,255			467,686			432,255
Other borrowings		2,008			34,538			3,746			34,538
Long-term debt		20,620			20,620			20,620			20,620

Total liabilities		2,050,548			2,021,119			2,225,276			2,021,119
Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares – 100,000,000
Issued shares – 24,858,683 and 24,715,607 at March 31, 2004 and December 31, 2003, respectively		248			247
Issued shares – 24,978,518 and 24,715,607 at June 30, 2004 and December 31, 2003, respectively								250			247
Series A-1 non-voting common stock, $.01 par value:
Issued shares – 286,934 and 293,918 at March 31, 2004 and December 31, 2003, respectively		3			3
Issued shares – 281,056 and 293,918 at June 30, 2004 and December 31, 2003, respectively								3			3
Additional paid-in capital		169,074			167,751			170,147			167,751
Retained earnings		4,424			487			8,784			487
Treasury stock (shares at cost: 84,274 at March 31, 2004 and December 31, 2003)		(573	)		(573	)
Treasury stock (shares at cost: 84,274 at June 30, 2004 and December 31, 2003)								(573	)		(573	)
Deferred compensation		573			573			573			573
Accumulated other comprehensive income		8,838			3,268
Accumulated other comprehensive income (loss)								(4,857	)		3,268

Total stockholders’ equity		182,587			171,756			174,327			171,756

Total liabilities and stockholders’ equity	$	2,233,135		$	2,192,875		$	2,399,603		$	2,192,875

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(~~Dollars in~~In thousands except share data)


	Series A										Series A-1						Series A										Series A-1
	Convertible										Non-voting						Convertible										Non-voting
	Preferred Stock						Common Stock				Common Stock						Preferred Stock						Common Stock				Common Stock
	Shares			Amount			Shares		Amount		Shares			Amount			Shares			Amount			Shares		Amount		Shares			Amount
Balance at December 31, 2002		1,057,142		$	11			18,500,812	$	185		695,516		$	7			1,057,142		$	11			18,500,812	$	185		695,516		$	7
Comprehensive income:
Net income		—			—			—		—		—			—			–			–			–		–		–			–
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,760, net of reclassification amount of $666		—			—			—		—		—			—			–			–			–		–		–			–
Total comprehensive income
Tax benefit related to exercise of stock options		—			—			—		—		—			—
Total comprehensive income Tax benefit related to exercise of stock options																		–			–			–		–		–			–
Issuance of common stock		—			—			3,698,913		37		—			—			–			–			3,698,913		37		–			–
Conversion of preferred stock		(1,057,142	)		(11	)		2,114,284		21		—			—			(1,057,142	)		(11	)		2,114,284		21		–			–
Preferred dividends		—			—			—		—		—			—			–			–			–		–		–			–
Transfers		—			—			401,598		4		(401,598	)		(4	)		–			–			401,598		4		(401,598	)		(4	)
Sale of treasury stock		—			—			—		—		—			—			–			–			–		–		–			–

Balance at December 31, 2003		—			—			24,715,607		247		293,918			3			–			–			24,715,607		247		293,918			3
Comprehensive income:
Net income (unaudited)		—			—			—		—		—			—			–			–			–		–		–			–
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $2,999 (unaudited)		—			—			—		—		—			—
Total comprehensive income
Tax benefit related to exercise of stock options (unaudited)		—			—			—		—		—			—
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of ($4,375) (unaudited)																		–			–			–		–		–			–
Total comprehensive income Tax benefit related to exercise of stock options (unaudited)																		–			–			–		–		–			–
Issuance of common stock (unaudited)		—			—			136,092		1		—			—			–			–			250,049		3		–			–
Transfers (unaudited)		—			—			6,984		—		(6,984	)		—			–			–			12,862		–		(12,862	)		–

Balance at March 31, 2004 (unaudited)		—		$	—			24,858,683	$	248		286,934		$	3
Balance at June 30, 2004 (unaudited)																		–		$	–			24,978,518	$	250		281,056		$	3

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS –- UNAUDITED
(~~Dollars in~~In thousands)


	Three months ended March 31						Six Months Ended June 30
	2004			2003			2004			2003
Operating activities
Net income	$	3,937		$	3,031		$	8,297		$	6,888
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		750			1,250			1,113			2,850
Depreciation and amortization		394			366			788			710
Amortization and accretion on securities		1,376			1,975			2,820			4,580
Bank owned life insurance (BOLI) income		(321	)		(414	)		(650	)		(842	)
Gain on sale of securities		—			(341	)		–			(686	)
Originations of loans held for sale		(359,016	)		(452,891	)		(802,676	)		(1,152,374	)
Proceeds from sales of loans held for sale		367,166			446,047			825,812			1,111,305
Impact of reversing tax valuation allowance								–			(5,929	)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		1,282			(1,735	)		(5,574	)		(3,984	)
Accrued interest payable and other liabilities		(2,751	)		(1,867	)		2,172			(4,499	)

Net cash provided by (used in) operating activities		12,817			(4,579	)		32,102			(41,981	)
Investing activities
Purchases of available-for-sale securities		(11,552	)		(145,660	)		(136,661	)		(304,700	)
Proceeds from sales of available-for-sale securities		—			10,694			–			42,914
Maturities and calls of available-for-sale securities		1,800			1,800			6,345			6,900
Principal payments received on securities		39,422			63,550			107,100			154,955
Net increase in loans		(82,420	)		(50,408	)		(135,827	)		(88,366	)
Purchase of premises and equipment, net		(300	)		5			(645	)		(371	)

Net cash used in investing activities		(53,050	)		(120,019	)		(159,688	)		(188,668	)
Financing activities
Net increase in checking, money market and savings accounts		118,065			65,503			181,878			124,009
Net increase (decrease) in certificates of deposit		(67,204	)		34,108
Issuance of common stock		896			100
Net increase in certificates of deposit								1,489			19,778
Sale of common stock								1,742			470
Issuance of long-term debt								–			10,310
Net other borrowings		(32,494	)		(10,418	)		4,639			(19,058	)
Net federal funds purchased		11,242			65,100			19,011			72,565
Dividends paid		—			(280	)		–			(554	)

Net cash provided by financing activities		30,505			154,113			208,759			207,520

Net increase (decrease) in cash and cash equivalents		(9,728	)		29,515			81,173			(23,129	)
Cash and cash equivalents at beginning of period		69,551			88,744			69,551			88,744

Cash and cash equivalents at end of period	$	59,823		$	118,259		$	150,724		$	65,615

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	8,872		$	9,380		$	16,070		$	17,526
Cash paid during the period for income taxes		200			—			3,900			5,720
Non-cash transactions:
Transfers from loans/leases to other repossessed assets		—			16			328			52
Transfers from loans/leases to premises and equipment		57			40			190			91

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of Texas Capital Bancshares, Inc. (the “Company”) conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. The Consolidated Financial Statements of the Company include the accounts of the Company and its subsidiary, Texas Capital Bank, National Association (the “Bank”). Certain prior period balances have been reclassified to conform with the current period presentation.

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading.

Stock-Based Compensation

At ~~March 31,~~June 30, 2004, the Company had a stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to ~~Employees,~~Employees, and related interpretations. No stock-based employee compensation cost for options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation,to stock-based employee compensation.


	Three months ended March 31						Three Months Ended June 30						Six Months Ended June 30
	2004			2003			2004			2003			2004			2003
Net income:
Net income as reported	$	3,937		$	3,031		$	4,360		$	3,857		$	8,297		$	6,888
Add: Total stock-based employee compensation recorded, net of related tax effects		175			61
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(370	)		(238	)
Add: Total stock-based employee compensation recorded net of tax								71			61			246			241
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of tax								(238	)		(208	)		(578	)		(576	)

Pro forma net income	$	3,742		$	2,854		$	4,193		$	3,710		$	7,965		$	6,553

Basic income per share:
As reported	$	.16		$	.14		$	.17		$	.19		$	.33		$	.33
Pro forma	$	.15		$	.13		$	.17		$	.18		$	.32		$	.31
Diluted income per share:
As reported	$	.15		$	.14		$	.17		$	.18		$	.32		$	.32
Pro forma	$	.14		$	.13		$	.16		$	.17		$	.30		$	.30

The fair value of these options was estimated at the date of grant using a Black-Scholes value option pricing model with the following weighted average assumptions used for 2004 and 2003, respectively: a risk free interest rate of ~~3.56%~~3.84% and ~~2.85%~~2.95%, a dividend yield of 0%, a volatility factor of ~~.286~~.289 and ~~.001,~~.196, and an estimated life of five years.

(1) ACCOUNTING POLICIES (continued)

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

(2) EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per share (dollars in thousands except share and per share data):


	Three months ended March 31					Three Months Ended June 30					Six Months Ended June 30
	2004		2003			2004		2003			2004		2003
Numerator:
Net income	$	3,937	$	3,031		$	4,360	$	3,857		$	8,297	$	6,888
Preferred stock dividends		—		(274	)		–		(276	)		–		(550	)

Numerator for basic earnings per share-income available to common stockholders		3,937		2,757
Numerator for basic earnings per share- income available to common stockholders
Effective of dilutive securities:							4,360		3,581			8,297		6,338
Preferred stock dividends		—		274			–		276			–		550

Numerator for dilutive earnings per share-income available to common stockholders and assumed conversion	$	3,937	$	3,031		$	4,360	$	3,857		$	8,297	$	6,888

Denominator:
Denominator for basic earnings per share-weighted average shares		25,108,746		19,194,023
Effective of dilutive securities:							25,244,920		19,211,280			25,176,833		19,202,699
Employee benefit plans⁽¹⁾		967,009		125,053
Employee stock options⁽¹⁾							895,160		183,685			931,084		154,531
Convertible preferred stock		—		2,114,284			–		2,114,284			–		2,114,284

Dilutive potential common shares		967,009		2,239,337			895,160		2,297,969			931,084		2,268,815

Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		26,075,755		21,433,360			26,140,080		21,509,249			26,107,917		21,471,514

Basic earnings per share	$	.16	$	.14		$	.17	$	.18		$	.32	$	.32
Diluted earnings per share	$	.15	$	.14		$	.17	$	.19		$	.33	$	.33

(1)

~~Excludes employee stock~~Stock options ~~with~~outstanding of 27,500 in 2004 have not been included in diluted earnings per share because to do so would have been antidilutive for the periods presented. Stock options are antidilutive when the exercise price ~~equal to or greater~~is higher than ~~average~~the current market price of ~~$15.75 for 2004 and $7.25 for 2003.~~the Company’s common stock.

(3) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.


(Dollars in thousands)	March 31, 2004
Financial instruments whose contract amounts represent credit risk:
			June 30, 2004
Financial instruments whose contract amounts represent credit risk (dollars in thousands):
Commitments to extend credit	$	464,973	$	492,925
Standby letters of credit		24,997		30,209

QUARTERLY FINANCIAL SUMMARY – UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands except per share data)


	For the three months ended								For the three months ended								For the three months ended								For the three months ended
	March 31, 2004								March 31, 2003								June 30, 2004								June 30, 2003
	Average		Revenue/			Yield/			Average		Revenue/			Yield/			Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate			Balance		Expense (1)			Rate			Balance		Expense (1)			Rate
Assets
Securities	$	758,966	$	7,551			4.00	%	$	546,120	$	5,360			3.98	%	$	766,007	$	7,536			3.96	%	$	620,239	$	5,335			3.45	%
Federal funds sold		6,058		15			1.00	%		29,394		87			1.20	%		7,686		18			0.94	%		13,220		43			1.30	%
Deposits in other banks		829		2			0.97	%		979		3			1.24	%		995		4			1.62	%		923		4			1.74	%
Loans held for sale		61,177		1,157			7.61	%		100,177		1,460			5.91	%		68,922		1,456			8.50	%		141,375		1,944			5.52	%
Loans		1,265,840		15,549			4.94	%		1,019,507		13,236			5.27	%
Loans held for investment																		1,326,066		16,042			4.87	%		1,066,440		14,037			5.28	%
Less reserve for loan losses		17,720		—			—			14,944		—			—			18,205		–			–			16,100		–			–

Loans, net of reserve		1,309,297		16,706			5.13	%		1,104,740		14,696			5.39	%		1,376,783		17,498			5.11	%		1,191,715		15,981			5.38	%

Total earning assets		2,075,150		24,274			4.70	%		1,681,233		20,146			4.86	%		2,151,471		25,056			4.68	%		1,826,097		21,363			4.69	%
Cash and other assets		146,414								144,205								138,399								120,977

Total assets	$	2,221,564							$	1,825,438							$	2,289,870							$	1,947,074

Liabilities and Stockholders’ Equity
Transaction deposits	$	88,635	$	132			.60	%	$	59,584	$	112			0.76	%	$	95,031	$	140			0.59	%	$	62,476	$	121			.78	%
Savings deposits		504,530		1,499			1.19	%		381,587		1,640			1.74	%		560,182		1,639			1.18	%		407,081		1,629			1.61	%
Time deposits		534,981		3,112			2.34	%		524,622		3,630			2.81	%		566,369		3,169			2.25	%		575,325		3,847			2.68	%

Total interest bearing deposits		1,128,146		4,743			1.69	%		965,793		5,382			2.26	%		1,221,582		4,948			1.63	%		1,044,882		5,597			2.15	%
Other borrowings		620,982		2,631			1.70	%		496,617		2,885			2.36	%		574,942		2,600			1.82	%		495,511		2,849			2.31	%
Long-term debt		20,620		256			4.99	%		10,310		137			5.39	%		20,620		256			4.99	%		19,600		253			5.18	%

Total interest bearing liabilities		1,769,748		7,630			1.73	%		1,472,720		8,404			2.31	%		1,817,144		7,804			1.73	%		1,559,993		8,699			2.24	%

Demand deposits		265,039								213,991								289,973								246,822
Other liabilities		10,013								11,784								8,047								11,619
Stockholders’ equity		176,764								126,943								174,706								128,640

Total liabilities and stockholders’ equity	$	2,221,564							$	1,825,438							$	2,289,870							$	1,947,074

Net interest income			$	16,644							$	11,742							$	17,252							$	12,664
Net interest income to earning assets							3.23	%							2.83	%							3.23	%							2.78	%

Provision for loan losses				750								1,250								363								1,600
Non-interest income				3,312								3,327								3,116								2,818
Non-interest expense				13,329								9,378								13,496								16,901

Income before taxes				5,877								4,441
Income tax expense				1,940								1,410
Income (loss) before income taxes																				6,509								(3,019	)
Income tax expense (benefit)																				2,149								(6,876	)

Net income			$	3,937							$	3,031							$	4,360							$	3,857

Earnings per share:
Net income
Basic			$	.16							$	.14							$	.17							$	.19
Diluted			$	.15							$	.14							$	.17							$	.18
Return on average equity				8.96	%							9.68	%							10.04	%							12.03	%
Return on average assets				.71	%							.67	%							.77	%							.80	%
Equity to assets				7.96	%							6.95	%							7.63	%							6.61	%

(1)

The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.

QUARTERLY FINANCIAL SUMMARY – UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands except per share data)


	For the six months ended								For the six months ended
	June 30, 2004								June 30, 2003
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate
Assets
Securities	$	762,486	$	15,087			3.98	%	$	583,384	$	10,695			3.70	%
Federal funds sold		6,872		33			.97	%		21,262		130			1.23	%
Deposits in other banks		912		6			1.32	%		951		7			1.48	%
Loans held for sale		65,050		2,613			8.08	%		120,890		3,404			5.68	%
Loans held for investment		1,295,953		31,591			4.90	%		1,043,103		27,273			5.27	%
Less reserve for loan losses		17,963		–			–			15,525		–			–

Loans, net of reserve		1,343,040		34,204			5.12	%		1,148,468		30,677			5.39	%

Total earning assets		2,113,310		49,330			4.69	%		1,754,065		41,509			4.77	%
Cash and other assets		142,407								132,527

Total assets	$	2,255,717							$	1,886,592

Liabilities and Stockholders’ Equity
Transaction deposits	$	91,833	$	271			.59	%	$	61,038	$	233			.77	%
Savings deposits		532,356		3,138			1.19	%		394,404		3,269			1.67	%
Time deposits		550,675		6,281			2.29	%		550,114		7,477			2.74	%

Total interest bearing deposits		1,174,864		9,691			1.66	%		1,005,556		10,979			2.20	%
Other borrowings		597,962		5,231			1.76	%		496,061		5,734			2.33	%
Long-term debt		20,620		512			4.99	%		14,980		390			5.25	%

Total interest bearing liabilities		1,793,446		15,434			1.73	%		1,516,597		17,103			2.27	%

Demand deposits		277,506								230,497
Other liabilities		9,030								11,702
Stockholders’ equity		175,735								127,796

Total liabilities and stockholders’ equity	$	2,255,717							$	1,886,592

Net interest income			$	33,896							$	24,406
Net interest income to earning assets							3.23	%							2.81	%

Provision for loan losses				1,113								2,850
Non-interest income				6,431								6,145
Non-interest expense				26,828								26,279

Income before income taxes				12,386								1,422
Income tax expense (benefit)				4,089								(5,466	)

Net income			$	8,297							$	6,888

Earnings per share:
Basic			$	.33							$	.33
Diluted			$	.32							$	.32
Return on average equity				9.49	%							10.87	%
Return on average assets				.74	%							.74	%
Equity to assets				7.79	%							6.77	%

(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.

~~ITEM 2.~~
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. As a result, these forward looking statements involve substantial risks and uncertainties, many of which are beyond our control. The important factors that could cause actual results to differ materially from the forward looking statements include the following:

(1) Changes in interest rates

(2) Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities

(3) Changes in general economic and business conditions in areas or markets where we compete

(4) Competition from banks and other financial institutions for loans and customer deposits

(5) The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses

(6) The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels

(7) Changes in government regulations

For a more complete discussion of important factors that could cause results to differ materially from the forward looking statements included in this Report, including the factors listed above, see the discussion in our Annual Report on Form 10-K for the year ending December 31, 2003 under the caption “Investment Considerations”.

We have no obligation to update or revise any forward looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward looking statements in this quarterly report might not occur.

Results of Operations

Summary of Performance

The Company recorded net income of ~~$3.9~~$4.4 million, or ~~$.15~~$.17 per diluted common share, for the ~~first~~second quarter of 2004 compared to ~~$3.0~~$3.9 million, or ~~$.14~~$.18 per diluted common share ($.11 on an as adjusted basis; see non-GAAP disclosure on page 13), for the ~~first~~second quarter of 2003. Return on average equity was ~~8.96%~~10.04% and return on average assets was ~~.71%~~.77% for the ~~first~~second quarter of 2004 compared to ~~9.68%~~12.03% and ~~.67%~~.80% (7.23% and .48% on an as adjusted basis; see non-GAAP disclosure on page 13), respectively, for the ~~first~~second quarter of 2003.

The increase in net income and improvement in return on assets in 2004 are attributed to growth in net interest income, which came from continued earning asset growth, as well as an improvement in net interest margin. The reduction in return on equity resulted from the effect of the $34 million increase in stockholders’ equity from the initial public offering of our common stock completed during the third quarter of 2003. Net interest income for the ~~first~~second quarter of 2004 increased by ~~$4.9~~$4.6 million, or ~~41.7%~~36%, from ~~$11.7~~$12.7 million to ~~$16.6~~$17.3 million over the ~~first~~second quarter of 2003. The increase in net interest income was due to an increase in average earning assets of ~~$393.9~~$325.4 million, or ~~23.4%~~18%, with a 4045 basis point increase in net interest margin.

Non-interest expense increased ~~$4.0~~$3.1 million, or ~~42.1%~~30% (net of $6.3 million in repurchase penalties and $250,000 in separation expenses), compared to the ~~first~~second quarter of 2003. ~~Salaries~~The increase is primarily related to a $2.4 million increase in salaries and employee benefits ~~increased by $2.7~~to $8.0 million ~~or 51.0%~~from $5.6 million (net of $250,000 in separation expenses). ~~Total full time employees increased from 224 at March 31, 2003 to 355 at March 31, 2004; the~~The increase related to ~~continued~~general business growth, staffing for the new Houston office and the start-up of the residential mortgage lending division.

Non-GAAP Financial Measure

During the quarter ended June 30, 2003, net income included the impact of reversing our deferred tax asset valuation allowance of $5.9 million, $6.3 million in penalties related to unwinding repurchase agreements prior to maturity and approximately $250,000 in separation expense related to the resignation of a senior officer. For the quarter ended June 30, 2003, adjusted income, or income per share excluding the impact of reversing the valuation allowance, unwinding penalties and separation expense would have been $0.11, on a diluted basis. Adjusted income per share, or income per share excluding the impact of reversing the valuation allowance, unwinding penalties and separation expense for the quarter ended June 30, 2003 is a non-GAAP financial measure. As disclosed in our second quarter 2003 Form 10Q, management believes that this non-GAAP financial measure is useful to investors and to management because they provide additional information that more closely reflects our intrinsic operating performance and growth. Reversal of the entire valuation allowance was based on our assessment of our ability to generate earnings to allow the deferred tax assets to be realized which is supported by our current earnings trends. We unwound certain repurchase agreements, incurring the unwinding penalties, in order to take advantage of historical lows in interest rates, which had decreased on similar repurchase agreements by approximately 1.4 percent since the time we entered into the original repurchase agreements. Although we have experienced employee separations in the past, this was the first separation with an executive who had entered into an employee agreement with us. We currently have only four other employees with employment agreements. Since we have not had any reversals of valuation allowances, unwinding penalties or separation expenses related to employees who have employment agreements in our operating history, we believe that this non-GAAP financial measure is useful to investors and to management to understand the development of our income per share results since our formation and to help in comparing our intrinsic operating performance in different periods. Management also uses this measure internally to evaluate our performance and manage our operations. This measurement should not be regarded as a replacement for corresponding GAAP measures, including net income.

The following table reconciles income per share excluding the impact of reversing the valuation allowance, unwinding penalties and separation expense to income per share, which is the most directly comparable financial measure presented in accordance with GAAP.

Reconciliation of GAAP to income per share, excluding the impact of reversing the valuation allowance, unwinding penalties and separation expense.

(In thousands, except share and per share data)


	Three Months			Six Months
	Ended			Ended
	June 30, 2003			June 30, 2003
	(Unaudited)
Net income	$	3,857		$	6,888
Repurchase agreement unwinding penalties		6,262			6,262
Executive separation		250			250
Tax effect of repurchase agreement unwinding penalties and separation costs		(2,120	)		(2,120	)
Impact of reversing deferred tax asset valuation allowance		(5,929	)		(5,929	)

Income excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense		2,320			5,351
Preferred stock dividends		(276	)		(550	)

Numerator used to calculate basic income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense		2,044			4,801
Effect of dilutive securities		276			550

Numerator used to calculate income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense	$	2,320		$	5,351

Denominator used for GAAP and basic income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense		19,211,280			19,202,699
Denominator used for GAAP and diluted income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense		21,509,249			21,471,514
Basic income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense	$	.11		$	.25
Diluted income per share excluding the impact of reversing the valuation allowance, unwinding penalties, and separation expense	$	.11		$	.25

Net Interest Income

Net interest income was ~~$16.6~~$17.3 million for the ~~first~~second quarter of 2004, compared to ~~$11.7~~$12.7 million for the ~~first~~second quarter of 2003. The increase was due to an increase in average earning assets of ~~$393.9~~$325.4 million as compared to the ~~first~~second quarter of 2003 and a 4045 basis point increase in net interest margin. The increase in average earning assets included a ~~$204.6~~$259.6 million increase in average ~~net~~ loans held for investment and a ~~$212.8~~$145.8 million increase in average securities. For the quarter ended ~~March 31,~~June 30, 2004, average net loans and securities represented ~~63%~~64% and ~~37%~~36%, respectively, of average earning assets compared to ~~66%~~65% and ~~32%~~34% in the same quarter of 2003. ~~The decrease in loan percentage reflects management’s decision to tighten lending standards beginning in 2001 and continuing during 2003 pending clearer signs of improvement in the U.S. economy.~~ While we continue to apply prudent lending standards, loan growth in the ~~first~~second quarter of 2004 in our core loan portfolio (excluding loans held for sale) totaled ~~$82.0~~$52.6 million. Our securities percentage has increased as we have continued to use additional securities to increase our earnings and improve our return on equity by taking advantage of market spreads.

Average interest bearing liabilities increased ~~$297.0~~$257.2 million from the ~~first~~second quarter of 2003, which included a ~~$162.4~~$176.7 million increase in interest bearing deposits and a ~~$124.4~~$79.4 million increase in other borrowings. The increase in average borrowings was primarily related to an increase in securities sold under repurchase agreements and was used to supplement deposits in funding loan growth and securities purchases. The average cost of interest bearing liabilities decreased from ~~2.31%~~2.24% for the quarter ended ~~March 31,~~June 30, 2003 to 1.73% for the same period of 2004, reflecting the reduction in market interest rates.

Net interest income was $33.9 million for the first six months of 2004, compared to $24.4 million for the same period of 2003. The increase was due to an increase in average earning assets of $359.2 million as compared to 2003 and a 42 basis point increase in net interest margin. The increase in average earning assets included a $252.9 million increase in average loans held for investment and a $179.1 million increase in average securities. For the six months ended June 30, 2004, average net loans and securities represented 64% and 36%, respectively, of average earning assets compared to 65% and 33% in the same period of 2003.

Average interest bearing liabilities increased $276.8 million from the second quarter of 2003, which included a $169.3 million increase in interest bearing deposits and a $101.9 million increase in other borrowings. The increase in average borrowings was primarily related to an increase in securities sold under repurchase agreements and was used to supplement deposits in funding loan growth and securities purchases. The average cost of interest bearing liabilities decreased from 2.27% for the six months ended June 30, 2003 to 1.73% for the same period of 2004, reflecting the reduction in market interest rates.

TABLE 1 — VOLUME/RATE ANALYSIS
(~~Dollars in~~In thousands)


										Three Months Ended									Six Months Ended
	Three months ended March 31, 2004/2003									June 30, 2004/2003									June 30, 2004/2003
				Change Due To⁽¹⁾									Change Due To (1)									Change Due To (1)
	Change			Volume			Yield/Rate			Change			Volume			Yield/Rate			Change			Volume			Yield/Rate
Interest income:
Securities	$	2,191		$	2,151		$	40		$	2,201		$	1,236		$	965		$	4,392		$	3,322		$	1,070
Loans held for sale		(303	)		(561	)		258			(488	)		(999	)		511			(791	)		(1,567	)		776
Loans		2,313			3,336			(1,023	)
Loans held for investment											2,005			3,370			(1,365	)		4,318			6,705			(2,387	)
Federal funds sold		(72	)		(69	)		(3	)		(25	)		(18	)		(7	)		(97	)		(88	)		(9	)
Deposits in other banks		(1	)		—			(1	)		–			–			–			(1	)		–			(1	)

Total		4,128			4,857			(729	)		3,693			3,589			104			7,821			8,372			(551	)
Interest expense:
Transaction deposits		20			56			(36	)		19			63			(44	)		38			118			(80	)
Savings deposits		(141	)		522			(663	)		10			607			(597	)		(131	)		1,156			(1,287	)
Time deposits		(518	)		103			(621	)		(678	)		(70	)		(608	)		(1,195	)		28			(1,223	)
Borrowed funds		(135	)		736			(871	)		(246	)		313			(559	)		(381	)		1,047			(1,428	)

Total		(774	)		1,417			(2,191	)		(895	)		913			(1,808	)		(1,669	)		2,349			(4,018	)

Net interest income	$	4,902		$	3,440		$	1,462		$	4,588		$	2,676		$	1,912		$	9,490		$	6,023		$	3,467

(1)

Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

Net interest margin, the ratio of net interest income to average earning assets, was 3.23% for the ~~first~~second quarter of 2004 compared to ~~2.83%~~2.78% for the ~~first~~second quarter of 2003. The increase was due to a ~~slight decrease in the~~stable level of yield on earning ~~asset yield from the first quarter of 2003, and~~assets coupled with a ~~much larger~~51 basis point decrease in the cost of interest bearing liabilities.

Non-interest Income

Non-interest income, excluding gain on sale of securities, increased ~~$326,000~~$643,000 in the second quarter of 2004 compared to the same quarter of 2003. ~~This increase was due to the increase in deposits, which resulted in a higher volume of transactions.~~ Trust fee income increased ~~$156,000,~~$148,000 due to continued growth of trust assets in 2003 and 2004. Gain on sale of mortgage loans totaled ~~$463,000~~$729,000 and relates to our newly created residential mortgage lending division. ~~Cash processing~~Offsetting these increases was a decrease in mortgage warehouse fees. Mortgage warehouse fees totaled ~~$587,000~~$274,000 for the ~~first~~second quarter of 2004, compared to ~~$900,000~~$424,000 for the second quarter of 2003. The decrease was due to more normalized production levels in 2004 as compared to a peak in production during the second and third quarters of 2003 as overall refinancings reached record levels.

Non-interest income, excluding gain on sale of securities, increased $972,000 during the six months ended June 30, 2004 to $6.4 million compared to $5.5 million during the same ~~quarter~~period of 2003. Trust fee income increased $304,000 due to continued growth of trust assets in 2003 and 2004. Gain on sale of mortgage loans totaled $1.2 million and relates to our newly created residential mortgage lending division. Offsetting these increases were decreases in cash processing fees and mortgage warehouse fees. Cash processing fees were $386,000 lower in the first six months of 2004 compared to the same period of 2003. These fees ~~are~~were related to a special project that ~~has~~ occurred in the first quarter of 2002, 2003 and 2004. 2004 fees are lower than 2003 fees

due to smaller participation and more competitive pricing. Mortgage warehouse fees totaled $512,000 for the first six months of 2004, compared to $703,000 for the same period of 2003. The decrease was due to more normalized production levels in 2004 as compared to a peak in production during the second and third quarters of 2003 as overall refinancings reached record levels.

While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry would likely place additional demands on capital and managerial resources.

TABLE 2 – NON-INTEREST INCOME
(~~Dollars in~~In thousands)


	Three months ended March 31				Three Months Ended June 30				Six Months Ended June 30
	2004		2003		2004		2003		2004		2003
Service charges on deposit accounts	$	857	$	843	$	891	$	897	$	1,748	$	1,740
Trust fee income		437		281		454		306		891		587
Gain on sale of securities		—		341		–		345		–		686
Cash processing fees		587		900		–		73		587		973
Bank owned life insurance (BOLI) income		321		414		329		428		650		842
Mortgage warehouse fees		238		279		274		424		512		703
Gain on sale of mortgage loans		463		—		729		–		1,192		–
Other		409		269		439		345		851		614

Total non-interest income	$	3,312	$	3,327	$	3,116	$	2,818	$	6,431	$	6,145

Non-interest expense for the ~~first~~second quarter of 2004 increased ~~$4.0~~$3.1 million, or ~~42.1% compared~~30%, to $13.5 million from $10.4 million (net of $6.3 million in repurchase penalties and $250,000 in separation expenses incurred in the ~~first~~second quarter of ~~2003. Salaries~~2003; see discussion of non-GAAP measures on page 13), and is primarily related to a $2.4 million increase in salaries and employee benefits ~~increased by $2.7~~to $8.0 million ~~or 51.0%. Total full time~~from $5.6 million. The increase in salaries and employee benefits resulted from an increase in the total number of employees ~~increased from 224 at March 31, 2003~~related to ~~355 at March 31, 2004. Additional employees include employees hired in~~general business growth, staffing for the new Houston office ~~employees in our recently created~~and the start-up of the residential mortgage lending ~~division as well as additional employees in our lending and support functions.~~division.

Advertising expense increased ~~$92,000~~$97,000, or ~~47.7%~~49%. Advertising expense for the three months ended ~~March 31,~~June 30, 2004 included ~~$27,000~~$33,000 of direct marketing and branding and ~~$258,000~~$263,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to $31,000 of direct marketing and branding and ~~$162,000~~$168,000 for the purchase of miles during the same period for 2003.

Net occupancy expense for the three months ended ~~March 31,~~June 30, 2004 increased by ~~$145,000~~$142,000, or ~~12.2%~~12%, compared to the same quarter in 2003 and is related to our continued business growth, the new Houston office and the start-up of the residential mortgage lending division. Legal and professional expense for the three months ended ~~March 31,~~June 30, 2004 ~~increased $210,000~~decreased $151,000 or ~~36.3%~~16% compared to the same quarter in 2003. The decrease resulted from a decrease in non-performing loans and leases since 2003. Communications and data processing expense for the three months ended ~~March 31,~~June 30, 2004 increased ~~$139,000~~$259,000 or ~~19.3%~~35% compared to the same quarter in ~~2003. Both increases are~~2003 due to continued growth.

13Non-interest expense for the first six months of 2004 increased $7.0 million, or 36%, to $26.8 million from $19.8 million during the same period in 2003 (net of $6.3 million in repurchase penalties and $250,000 in separation expenses incurred in the second quarter of 2003; see discussion of non-GAAP measures on page 13), and is primarily related to a $5.1 million increase in salaries and employee benefits to $16.1 million from $11.0 million. The increase in salaries and employee benefits resulted from an increase in the total number of employees related to general business growth, staffing for the new Houston office and the start-up of the residential mortgage lending division.

Advertising expense increased $189,000, or 48%. Advertising expense for the six months ended June 30, 2004 included $60,000 of direct marketing and branding and $521,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to $62,000 of direct marketing and branding and $330,000 for the purchase of miles during the same period for 2003.

Net occupancy expense for the six months ended June 30, 2004 increased by $289,000, or 12%, compared to the same period in 2003 and is related to our continued business growth, the new Houston office and the start-up of the residential mortgage lending division. Legal and professional expense for the six months ended June 30, 2004 increased $63,000 or 4% compared to the same period in 2003. Communications and data processing expense for the six months ended June 30, 2004 increased $398,000 or 27% compared to the same period in 2003 due to continued growth.

TABLE 3 – NON-INTEREST EXPENSE
(~~Dollars in~~In thousands)


	Three months ended March 31				Three Months Ended June 30				Six Months Ended June 30
	2004		2003		2004		2003		2004		2003
Salaries and employee benefits	$	8,123	$	5,379	$	7,964	$	5,857	$	16,094	$	11,236
Net occupancy expense		1,332		1,187		1,341		1,199		2,675		2,386
Advertising and affinity payments		285		193		296		199		581		392
Legal and professional		789		579		779		930		1,572		1,509
Communications and data processing		859		720		995		736		1,854		1,456
Franchise taxes		97		37		56		37		153		74
Repurchase agreement penalties						–		6,262		–		6,262
Other		1,844		1,283		2,065		1,681		3,899		2,964

Total non-interest expense	$	13,329	$	9,378	$	13,496	$	16,901	$	26,828	$	26,279

The aggregate loan portfolio at ~~March 31,~~June 30, 2004 increased ~~$73.8~~$111.7 million from December 31, 2003 to ~~$1.39~~$1.4 billion. Commercial loans increased ~~$44.9~~$96.6 million and real estate loans increased ~~$17.4~~$3.5 million. Construction loans and consumer loans increased ~~$18.5~~$36.8 million and ~~$2.8 million,~~$211,000, respectively, and leases decreased ~~$1.8~~$2.6 million.

We continue to lend primarily in Texas. As of ~~March 31,~~June 30, 2004, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased individual leases and loan and lease pools (primarily commercial and industrial equipment and vehicles), as well as selected loan participations and USDA government guaranteed loans.

Summary of Loan Loss Experience

The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled ~~$18.0~~$18.3 million at ~~March 31,~~June 30, 2004, $17.7 million at December 31, 2003 and ~~$15.9~~$17.3 million at ~~March 31,~~June 30, 2003. This represents ~~1.30%~~1.34%, ~~1.35%~~1.44% and ~~1.35%~~1.58% of ~~total~~ loans held for investment (net of unearned income) at ~~March 31,~~June 30, 2004, December 31, 2003 and ~~March 31,~~June 30, 2003, respectively.

The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. The Company recorded a provision of ~~$750,000~~$363,000 for the quarter ended ~~March~~June 2004 and ~~$1.3~~$1.6 million for the same quarter in 2003. These provisions were made to reflect management’s assessment of the risk of loan losses specifically including the significant growth in outstanding loans during each of these periods.

The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of specific reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $1,000,000 are specifically reviewed and a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments.

The reserve allocation percentages assigned to each credit grade have been developed based on an analysis of the Company’s historical loss rates and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to differ from past experience. The unallocated portion of the general reserve serves to compensate for additional areas of uncertainty and considers industry trends. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio.

The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectibility of larger classified loans is continuously recalculated with new information. As our portfolio matures, historical loss ratios are being closely monitored, and our reserve adequacy will rely primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

1518

TABLE 5 – SUMMARY OF LOAN LOSS EXPERIENCE
(~~Dollars in~~In thousands)


	Three months ended			Three months ended			Year ended
	March 31,			March 31,			December 31,			Six Months Ended			Six Months Ended			Year Ended
	2004			2003			2003			June 30, 2004			June 30, 2003			December 31, 2003
Beginning balance	$	17,727		$	14,538		$	14,538		$	17,727		$	14,538		$	14,538
Loans charged-off:
Commercial		—			—			50			–			17			50
Real estate		—			—			402			–			–			402
Consumer		—			—			5			6			2			5
Leases		493			13			618			759			250			618

Total		493			13			1,075			765			269			1,075
Recoveries:
Commercial		—			78			78			–			78			78
Leases		27			40			161			203			77			161

Total recoveries		27			118			239			203			155			239

Net charge-offs (recoveries)		466			(105	)		836
Net charge-offs											562			114			836
Provision for loan losses		750			1,250			4,025			1,113			2,850			4,025

Ending balance	$	18,011		$	15,893		$	17,727		$	18,278		$	17,274		$	17,727

Reserve for loan losses to loans outstanding at end of period		1.30	%		1.35	%		1.35	%
Net charge-offs (recoveries) to average loans⁽¹⁾		.14	%		(.04	)%		.07	%
Provision for loan losses to average loans⁽¹⁾		.23	%		.45	%		.33	%
Reserve to loans held for investment⁽²⁾											1.34	%		1.58	%		1.44	%
Net charge-offs to average loans^{(1) (2)}											.09	%		.02	%		.08	%
Provision for loan losses to average loans^{(1) (2)}											.17	%		.55	%		.37	%
Recoveries to gross charge-offs		5.48	%		907.69	%		22.23	%		26.54	%		57.62	%		22.23	%
Reserve as a multiple of net charge-offs		38.7	x		—			21.2	x		32.5	x		151.5	x		21.2	x
Non-performing and renegotiated loans:
Loans past due (90 days)⁽²⁾	$	6,250		$	38		$	7
Loans past due (90 days)										$	4,423		$	1,145		$	7
Non-accrual		6,953			3,769			10,217			6,393			11,545			10,217

Total	$	13,203		$	3,807		$	10,224		$	10,816		$	12,690		$	10,224

Reserve as a percent of non-performing and renegotiated loans⁽²⁾		136.42	%		417.47	%		173.39	%
Reserve as a percent of non-performing and renegotiated loans											168.99	%		136.12	%		173.39	%


(2)		~~Subsequent to March 31, 2004, a $6.0 million past due loan was refinanced resulting in a reduction of total non-performing~~Excludes loans ~~to $7.2 million and increasing the allowance to non-performing loans ratio from 136.42% to 250.05%.~~held for sale.

At ~~March 31,~~June 30, 2004, we had ~~$6,250,000~~$4.4 million in loans past due 90 days and still accruing interest. ~~Subsequent to March 31, 2004, a $6.0~~Of the past-due total, $1.1 million ~~past due loan~~is fully guaranteed by the United States Government and $3.0 million was ~~refinanced resulting in a reduction of total non-performing loans.~~brought current shortly after quarter-end. At ~~March 31,~~June 30, 2004, we had ~~$64,000~~$392,000 in other repossessed assets.

Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. As of ~~March 31,~~June 30, 2004, approximately ~~$4.0~~$4.1 million of our non-accrual loans were earning on a cash basis.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.

Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.

Our unrealized gain on the securities portfolio value decreased from a gain of $5.0 million, which represented .65% of the amortized cost, at December 31, 2003, to a loss of $7.5 million, which represented .95% of the amortized cost, at June 30, 2004.

The following table discloses, as of June 30, 2004, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):


	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasuries	$	1,896	$	(1	)	$	–	$	–		$	1,896	$	(1	)
Mortgage-backed securities		472,033		(9,989	)		–		–			472,033		(9,989	)
Corporate securities		41,125		(335	)		–		–			41,125		(335	)
Municipals		19,354		(630	)		–		–			19,354		(630	)
Equity securities		499		(7	)		1,418		(82	)		1,917		(89	)

	$	534,907	$	(10,962	)	$	1,418	$	(82	)	$	536,325	$	(11,044	)

We believe the investment securities in the table above are within ranges customary for the banking industry. The number of investment positions in this unrealized loss position totals 30. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; (2) it is not probable that we will be unable to collect the amounts contractually due; and (3) no decision to dispose of the investments were made prior to the date of issuance of this report. The unrealized losses noted are interest rate related due to rising rates at June 30, 2004 in relation to previous rates in mid-2003. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our ~~bank’s~~ Balance Sheet Management Committee (BSMC), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2003 and for the ~~three~~six months ended ~~March 31,~~June 30, 2004, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank).

Since early 2001, our liquidity needs have primarily been fulfilled through growth in our core customer deposits. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of ~~March 31,~~June 30, 2004, comprised ~~$1,405.8~~$1,535.4 million, or ~~94.0%~~94.3%, of total deposits. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect, our internet banking facility.

In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. As of ~~March 31,~~June 30, 2004, brokered retail CDs comprised ~~$90.1~~$93.0 million, or ~~6.0%~~5.7%, of total deposits. Our dependence on retail brokered CDs is limited by our internal funding guidelines, which as of ~~March 31,~~June 30, 2004, limited borrowing from this source to 10-20% of total deposits.

Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), securities sold under repurchase agreements, treasury, tax and loan notes, and advances from the Federal Home Loan Bank, or FHLB. As of ~~March 31,~~June 30, 2004, our borrowings consisted of a total of ~~$416.4~~$455.5 million of securities sold under repurchase agreements, ~~$90.2~~$98.0 million of downstream federal funds purchased, ~~$15.9~~$12.2 million from customer repurchase agreements, and ~~$2.0~~$3.7 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with the FHLB. At ~~March 31,~~June 30, 2004, we had no borrowings from the FHLB. Our unused FHLB borrowing capacity at ~~March 31,~~June 30, 2004 was approximately ~~$200.0~~$181.0 million. As of ~~March 31,~~June 30, 2004, we had unused upstream federal fund lines available from commercial banks of approximately ~~$72.6~~$115.5 million. During the ~~three~~six months ended ~~March 31,~~June 30, 2004, our average other borrowings from

these sources were ~~$621.0~~$598.0 million or ~~28.0%~~29.2% of average ~~assets,~~total fundings, which is well within our internal funding guidelines, which limit our dependence on borrowing sources to ~~25-30%~~35% of total ~~assets.~~fundings. The maximum amount of borrowed funds outstanding at any month-end during the first ~~three~~six months of 2004 was ~~$622.5~~$624.1 million, or ~~27.8%~~29.5%, of total ~~assets.~~fundings.

As of ~~March 31,~~June 30, 2004, our significant fixed and determinable contractual obligations to third parties were as follows:

(Dollars in thousands)


			After One		After Three								After One		After Three		After
	Within		but Within		but Within		After Five				Within		but Within		but Within		Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
											One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity⁽¹⁾	$	955,760	$	—	$	—	$	—	$	955,760	$	1,019,571	$	–	$	–	$	–	$	1,019,571
Time deposits⁽¹⁾		405,395		114,948		19,788		—		540,131		439,750		117,786		51,281		9		608,826
Federal funds purchased		90,203		—		—		—		90,203		97,972		–		–		–		97,972
Securities sold under repurchase agreements		267,016		138,150		11,200		—		416,366		286,848		157,450		11,200		–		455,498
Customer repurchase agreements		15,925		—		—		—		15,925		12,188		–		–		–		12,188
Treasury, tax and loan notes		2,008		—		—		—		2,008		3,746		–		–		–		3,746
Operating lease obligations		3,178		6,429		6,120		4,203		19,930		3,391		6,929		6,458		3,660		20,438
Long-term debt		—		—		—		20,620		20,620		–		–		–		20,620		20,620

Total contractual obligations	$	1,739,485	$	259,527	$	37,108	$	24,823	$	2,060,943	$	1,863,466	$	282,165	$	68,939	$	24,289	$	2,238,859

The contractual amount of our financial instruments with off-balance sheet risk expiring by period at ~~March 31,~~June 30, 2004 is presented below:

Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above.

Our equity capital averaged ~~$176.8~~$175.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2004 as compared to ~~$126.9~~$127.8 million for the same period in 2003. This increase reflects our retention of net earnings during this period and the ~~IPO proceeds.~~proceeds from the initial public offering of our common stock which was consummated in August 2003. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.

Critical Accounting Policies

The Securities and Exchange Commission (SEC) recently issued guidance for the disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements in our 2003 Form 10K filed with the SEC. Not all these significant accounting policies require management to make difficult, subjective, or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.

Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114,Accounting by Creditors for Impairment of a Loan, and SFAS No. 5,Accounting for Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

Management considers the policies related to income taxes to be critical to the financial statement presentation. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. In 2003, as a result of a reassessment of our ability to generate sufficient earnings to allow the utilization of our deferred tax assets, we believed it was more likely than not that the deferred tax assets will be realized. Accordingly, in compliance with SFAS No. 109, we reversed the valuation allowance and certain related tax reserves during the period.

1923

~~ITEM 3.~~
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.

The Company is subject to market risk primarily through the effect of changes in interest rates on its portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to the Company.

The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also establish maximum levels for short-term borrowings, short-term assets, and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to the full board of directors on a quarterly basis.

Interest Rate Risk Management

We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.

The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the London Interbank Offering Rate are the basis for most of our variable-rate loan pricing.

The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.

The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates have continued to fall since 2001 we could not assume interest rate changes of 200 basis points as the results of the decreasing rates scenario would be negative rates. Therefore, our “shock test” scenarios with respect to decreases in rates now assume a decrease of 100 basis points in the current interest rate environment. We will continue to evaluate these scenarios as interest rates change, until short term rates rise above 2.0%.

Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential, and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model.

2024

This modeling indicated interest rate sensitivity is as follows:

TABLE 7 – INTEREST RATE SENSITIVITY
(Dollars in thousands)

Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
200 bp Increase 100 bp Decrease
March 31, 2004
March 31, 2004
Change in net interest income $ 10,343 $ (5,825 )


	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase		100 bp Decrease
	June 30, 2004		June 30, 2004
Change in net interest income	$	8,355	$	(4,653	)

~~The estimated changes in interest rates on net interest income are within guidelines established by our board of directors for all interest rate scenarios.~~

The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.

We expect our balance sheet will continue to be asset sensitive over the next twelve months, largely due to the concentration of assets in variable rate loans. If, as we expect will occur, interest rates rise in 2004, this asset-sensitivity will tend to result in an increase in our interest margin, all other factors being equal. In the event of a rising rate environment, management may choose to fund investment securities purchased with term liabilities/deposits to lock in a return. Investment securities are generally held in the “available-for-sale” category so that gains and losses can be realized as appropriate. At certain times, we use the “held-to-maturity” category if we are not planning to sell these securities before maturity.

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures as of ~~March 31,~~June 30, 2004 and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could significantly affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

2125

PART II — OTHER INFORMATION

ITEM 5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On May 18, 2004, the Company held it annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, out of 24,860,283 shares of common stock entitled to vote at the meeting, the holders of 19,884,530 shares were present in person or by proxy. At the Annual Meeting, each nominee for director discussed in the Company’s Proxy Statement dated April 20, 2004 regarding the Annual Meeting was elected a director of the Company. The votes received by each nominee for director are set forth below:


Nominee	Votes Received		Votes Withheld
Peter B. Bartholow		19,379,792		504,738
Leo Corrigan III		19,767,304		117,226
James R. Erwin		17,198,222		2,686,308
Joseph M. Grant		19,650,592		233,938
Frederick B. Hegi, Jr.		16,485,137		3,399,393
James R. Holland, Jr.		19,409,904		474,626
George F. Jones, Jr.		19,738,692		145,838
Larry A. Makel		19,738,692		145,838
Walter W. McAllister III		19,327,582		556,948
Lee Roy Mitchell		16,479,859		3,404,671
Steve Rosenberg		19,684,982		199,548
John C. Snyder		19,736,895		147,635
Robert W. Stallings		19,685,982		198,548
James Cleo Thompson, Jr.		16,485,437		3,399,093
Ian J. Turpin		16,470,822		3,413,708

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, filed herewith.

32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, filed herewith.

(b) Report on Form 8-K

Current report filed on Form 8-K regarding Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and Item 12 (Results of Operations and Financial Condition) dated ~~January 27,~~May 6, 2004.

2226

EXHIBIT INDEX

~~Exhibit Number~~


Exhibit Number
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, filed herewith.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, filed herewith.

2428


Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Operations — Unaudited		3
	Consolidated Balance Sheets		4
	Consolidated Statements of Changes in Stockholders’ Equity		5
	Consolidated Statements of Cash Flows — Unaudited		6
	Notes to Consolidated Financial Statements — Unaudited		7
	Financial Summaries — Unaudited		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1112
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2024
Item 4.	Controls and Procedures		2125
Part II. Other Information
Item 6.5. Submission of Matters to Vote of Security Holders		26
Item 6. Exhibits and Reports on Form 8-K		2226
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


	March 31,		December 31,		June 30,		December 31,
	2004		2003		2004		2003
Commercial	$	653,458	$	608,542	$	705,160	$	608,542
Construction		274,597		256,134		292,907		256,134
Real estate		356,511		339,069		342,522		339,069
Consumer		19,349		16,564		16,775		16,564
Leases		11,363		13,152		10,524		13,152
Loans held for sale		72,789		80,780		58,058		80,780

Total	$	1,388,067	$	1,314,241	$	1,425,946	$	1,314,241


	March 31,			March 31,			June 30,			June 30,
	2004			2003			2004			2003
Risk-based capital:
Tier 1 capital		11.73	%		9.69	%		11.44	%		10.27	%
Total capital		12.84	%		10.88	%		12.50	%		11.50	%
Leverage		8.67	%		7.15	%		8.62	%		7.43	%


		TEXAS CAPITAL BANCSHARES, INC.

Date: ~~May 10,~~August 6, 2004

		/s/Peter B. Bartholow

		Peter B. Bartholow
		Chief Financial Officer
		(Duly authorized officer and principal
		financial officer)


															Accumulated																				Accumulated
															Other																				Other
				Retained											Compre-									Retained											Compre-
	Additional			Earnings			Treasury Stock								hensive						Additional			Earnings			Treasury Stock								hensive
	Paid-in			(Accumulated									Deferred		Income						Paid-in			(Accumulated									Deferred		Income
	Capital			Deficit)			Shares			Amount			Compensation		(Loss)			Total			Capital			Deficit)			Shares			Amount			Compensation		(Loss)			Total
Balance at December 31, 2002	$	131,881		$	(13,347	)		(97,246	)	$	(668	)	$	573	$	6,334		$	124,976		$	131,881		$	(13,347	)		(97,246	)	$	(668	)	$	573	$	6,334		$	124,976
Comprehensive income:
Net income		—			13,834			—			—			—		—			13,834			–			13,834			–			–			–		–			13,834
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,760, net of reclassification amount of $666		—			—			—			—			—		(3,066	)		(3,066	)		–			–			–			–			–		(3,066	)		(3,066	)

Total comprehensive income																			10,768																				10,768
Tax benefit related to exercise of stock options		412			—			—			—			—		—			412			412			–			–			–			–		–			412
Issuance of common stock		36,167			—			—			—			—		—			36,204			36,167			–			–			–			–		–			36,204
Conversion of preferred stock		(10	)		—			—			—			—		—			—			(10	)		–			–			–			–		–			–
Preferred dividends		(699	)		—			—			—			—		—			(699	)		(699	)		–			–			–			–		–			(699	)
Transfers		—			—			—			—			—		—			—			–			–			–			–			–		–			–
Sale of treasury stock		—			—			12,972			95			—		—			95			–			–			12,972			95			–		–			95

Balance at December 31, 2003		167,751			487			(84,274	)		(573	)		573		3,268			171,756			167,751			487			(84,274	)		(573	)		573		3,268			171,756
Comprehensive income:
Net income (unaudited)		—			3,937			—			—			—		—			3,937			–			8,297			–			–			–		–			8,297
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $2,999 (unaudited)		—			—			—			—			—		5,570			5,570
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of ($4,375) (unaudited)																						–			–			–			–			–		(8,125	)		(8,125	)

Total comprehensive income																			9,507																				172
Tax benefit related to exercise of stock options (unaudited)		428			—			—			—			—		—			428			657			–			–			–			–		–			657
Issuance of common stock (unaudited)		895			—			—			—			—		—			896			1,739			–			–			–			–		–			1,742
Transfers (unaudited)		—			—			—			—			—		—			—			–			–			–			–			–		–			–

Balance at March 31, 2004 (unaudited)	$	169,074		$	4,424			(84,274	)	$	(573	)	$	573	$	8,838		$	182,587
Balance at June 30, 2004 (unaudited)																					$	170,147		$	8,784			(84,274	)	$	(573	)	$	573	$	(4,857	)	$	174,327


~~ITEM 2.~~	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	(1)		Changes in interest rates

	(2)		Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities

	(3)		Changes in general economic and business conditions in areas or markets where we compete

	(4)		Competition from banks and other financial institutions for loans and customer deposits

	(5)		The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses

	(6)		The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels

	(7)		Changes in government regulations


~~ITEM 3.~~	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

	(b)		Report on Form 8-K

			Current report filed on Form 8-K regarding Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and Item 12 (Results of Operations and Financial Condition) dated ~~January 27,~~May 6, 2004.